10-Q 1 a2049731z10-q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 333-31375* ------------------- FORMAN PETROLEUM CORPORATION (Exact name of registrant as specified in its charter) LOUISIANA 72-0954774 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 650 POYDRAS STREET - SUITE 2200 70130-6101 NEW ORLEANS, LOUISIANA (Zip code) (Address of principal executive offices) (504) 586-8888 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [X] No [ ] As of May 15, 2001, there were 984,042 shares of the Registrant's Voting Common Stock, no par value, outstanding. * The Commission file number refers to a Form S-4 Registration Statement filed by the Company under the Securities Act of 1933, which became effective September 26, 1997. FORMAN PETROLEUM CORPORATION FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2001 TABLE OF CONTENTS

ii PART I ITEM 1. FINANCIAL INFORMATION FORMAN PETROLEUM CORPORATION CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial statements. 1 FORMAN PETROLEUM CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these consolidated financial statements. 2 FORMAN PETROLEUM CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these consolidated financial statements. 3 FORMAN PETROLEUM CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 AND 2000 1. BUSINESS OVERVIEW Forman Petroleum Corporation (the "Company," "we" or "us") is an independent energy company engaged in the acquisition, exploitation, exploration, development and production of natural gas and crude oil. We have been active in the Gulf Coast Basin since 1982. The accompanying financial statements include the accounts of the Company and its wholly owned subsidiary, Ascent Energy Inc. PROPOSED RESTRUCTURING AND ACQUISITION. In January 2001, our majority stockholders organized a new corporation, Ascent Energy Inc., to acquire Pontotoc Production, Inc. Pursuant to that certain Agreement and Plan of Merger dated as of January 19, 2001, by and among Ascent Energy, Pontotoc Acquisition Corp. and Pontotoc Production, Inc. ("Pontotoc"), Ascent Energy has agreed to exchange $9.00 in cash and one share of its 8% Series B convertible preferred stock having a liquidation preference of $2.50 per share for each outstanding share of Pontotoc common stock (the "Offer"). Promptly following completion of the Offer, Ascent Energy intends to merge Pontotoc Acquisition Corp., its wholly owned subsidiary, with Pontotoc. Ascent Energy is obligated under the merger agreement to pay Pontotoc $2 million within five days of termination of the merger agreement if the termination is due to the failure of Ascent Energy to obtain financing and all other conditions to the Offer have been met. We have guaranteed this obligation. On March 20, 2001, we acquired all the outstanding shares of Ascent Energy common stock from our majority stockholders in exchange for $1,000 cash. In addition, we have agreed to cause Ascent Energy to repay approximately $76,000, in the aggregate, to our majority stockholders for certain out-of-pocket costs. Concurrently with the consummation of the Offer, it is expected that we will be restructured as a holding company by contributing all of our assets and recorded liabilities to Ascent Energy in exchange for additional shares of Ascent Energy common stock. To help fund the Pontotoc acquisition, Ascent Energy plans to offer approximately $21.1 million of its 8% Series A Redeemable Preferred Stock and warrants to purchase shares of its common stock to our existing stockholders on a pro rata basis. Ascent Energy expects to obtain the remainder of the funds necessary to finance the Pontotoc acquisition from borrowings under a new credit facility that it is currently negotiating with its primary lender and from its internal resources. Upon the closing of the Pontotoc acquisition, Ascent expects to have outstanding 21,100 shares of Series A preferred stock with a liquidation preference of $21.1 million, 5.3 million shares of 4 Series B preferred stock with a liquidation preference of $13.3 million and term debt of approximately $30 million. The credit agreement will be secured by substantially all of our assets, which will be contributed to Ascent Energy concurrently with the consummation of the Offer. 2. SIGNIFICANT ACCOUNTING POLICIES PERVASIVENESS OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. DEFERRED ACQUISITION COSTS Costs incurred during 2001, consisting primarily of consulting, legal and financial advisory fees, were capitalized in anticipation of the Pontotoc acquisition. These costs will be expensed in the event the acquisition is not ultimately completed. DERIVATIVES We use derivative financial instruments such as swap agreements and forward sales contracts for price protection purposes from time to time on a limited amount of our future production and not for trading purposes. Such derivatives are accounted for on an accrual basis and amounts paid or received under the agreements are recognized as oil and gas sales in the period in which they accrue. For the periods ended March 31, 2001 and 2000, we recorded additions to oil and gas sales of $-0- and $109,800, respectively, under these agreements. As of March 31, 2001 and through May 15, 2001, we had no open forward gas sales positions. PER SHARE AMOUNTS Net income or loss per share of common stock was calculated by dividing net loss applicable to common stock by the weighted-average number of common shares outstanding during the year. For 2001 and 2000, warrants and options were excluded because the exercise price of outstanding options and warrants (490,516 in 2001 and 490,526 in 2000) exceeded the fair value of our common stock. 5 ACCOUNTING CHANGES In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." We adopted SFAS No. 133 on January 1, 2001. SFAS No.133 establishes accounting and reporting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value, and that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Certain contracts that provide for the purchase or sale of a commodity that will be delivered in quantities expected to be used or sold by us over a reasonable period in the normal course of business may qualify for exemption from the provisions of SFAS No. 133. Our fixed-price forward sales contracts and swap contracts cover the pricing of physical delivery of our production in the normal course of business and are not subject to the requirements of SFAS No. 133 as we have designated these as normal sales. Therefore, the adoption of SFAS No. 133 did not have a material impact on our financial position or results of operations. RECLASSIFICATION Certain prior year amounts have been reclassified to conform to the presentation of such items in the current year. 3. INTERIM FINANCIAL STATEMENTS Our financial statements at March 31, 2001 and for the three month period then ended are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in our opinion, necessary for a fair presentation of the financial position and operating results for the interim periods. The financial statements should be read in conjunction with the financial statements and notes thereto, for the year ended December 31, 2000 contained in our Form 10-K (file number 333-31375) filed with the Commission on April 2, 2001. 4. LEGAL PROCEEDINGS From time to time, we may be a party to various legal proceedings. We currently are a party to a lawsuit arising in the ordinary course of business. Management does not expect this matter to have a material adverse effect on our financial position or results of operations. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following discussion is intended to assist in an understanding of our historical financial position and the results of operations for the three-month periods ended March 31, 2001 and 2000. Our financial statements at March 31, 2001 and for the three month period then ended are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. The financial statements should be read in conjunction with the financial statements and notes thereto, for the year ended December 31, 2000 contained in our Annual Report on Form 10-K (file number 333-31375) filed with the Commission on April 2, 2001. Our historical financial statements and notes thereto included elsewhere in this quarterly report contain detailed information that should be referred to in conjunction with the following discussion. RECENT DEVELOPMENTS In January 2001, our majority stockholders organized a new corporation, Ascent Energy Inc., to acquire Pontotoc Production, Inc. Pursuant to that certain Agreement and Plan of Merger dated as of January 19, 2001, by and among Ascent Energy, Pontotoc Acquisition Corp. and Pontotoc Production, Inc. ("Pontotoc"), Ascent Energy has agreed to exchange $9.00 in cash and one share of its 8% Series B convertible preferred stock having a liquidation preference of $2.50 per share for each outstanding share of Pontotoc common stock (the "Offer"). Promptly following completion of the Offer, Ascent Energy intends to merge Pontotoc Acquisition Corp., its wholly owned subsidiary, with Pontotoc. Ascent Energy is obligated under the merger agreement to pay Pontotoc $2 million within five days of termination of the merger agreement if the termination is due to the failure of Ascent Energy to obtain financing and all other conditions to the Offer have been met. We have guaranteed this obligation. On March 20, 2001, we acquired all the outstanding shares of Ascent Energy common stock from our majority stockholders in exchange for $1,000 cash. In addition, we have agreed to cause Ascent Energy to repay approximately $76,000, in the aggregate, to our majority stockholders for certain out-of-pocket costs. Concurrently with the consummation of the Offer, it is expected that we will be restructured as a holding company by contributing all of our assets and recorded liabilities to Ascent Energy in exchange for additional shares of Ascent Energy common stock. To help fund the Pontotoc acquisition, Ascent Energy plans to offer approximately $21.1 million of its 8% Series A Redeemable Preferred Stock and warrants to purchase shares of its common stock to our existing stockholders on a pro rata basis. Ascent Energy expects to obtain the remainder of the funds necessary to finance the Pontotoc acquisition from borrowings under a new credit facility that it is currently negotiating with its primary lender and from its internal resources. 7 Upon the closing of the Pontotoc acquisition, Ascent expects to have outstanding 21,100 shares of Series A preferred stock with a liquidation preference of $21.1 million, 5.3 million shares of Series B preferred stock with a liquidation preference of $13.3 million and term debt of approximately $30 million. The credit agreement will be secured by substantially all of our assets, which will be contributed to Ascent Energy concurrently with the consummation of the Offer. RESULTS OF OPERATIONS The following table sets forth certain operating information with respect to our oil and gas operations for the three-month periods ended March 31, 2001 and 2000:

----------------- (1) Barrels of oil equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids. REVENUES - The following table reflects an analysis of differences in our oil and gas revenues between the three month period ended March 31, 2001 and the comparable period in 2000: 8

For the quarter ended March 31, 2001, total oil and gas revenues increased $1,813,312 from revenues for the first quarter of 2000. Oil production for the first quarter of 2001 decreased 10.8% from the comparable quarter in 2000, and gas production between comparable periods decreased 16.6%. The decrease in oil and gas production resulted primarily from a general decline in production from all fields, combined with the 70% decline in production of gas from the Simoneaux 17 well. Oil prices for the quarter ended March 31, 2001 increased 9.2%, to $27.27 per Bbl from $24.98 per Bbl for the first quarter of 2000. Gas prices also increased during the quarter ended March 31, 2001 to $7.29 per Mcf from $2.69 per Mcf for the first quarter of 2000. LEASE OPERATING EXPENSES - On a BOE basis, lease operating expenses increased 24.1%, to $6.26 per BOE for the three months ended March 31, 2001 from $5.04 per BOE in the comparable 2000 period. This increase is due to the 14% reduction in production in 2001 as compared to the 2000 first quarter. For the quarter ended March 31, 2001 actual lease operating expenses were 6.6% higher than the comparable quarter in 2000. The increase for the quarter ended March 31, 2001 resulted primarily from the overall increase in the cost of services, combined with a salary increase for all field operating personnel, effective January 1, 2001. SEVERANCE TAXES - The effective severance tax rate as a percentage of oil and gas revenues increased to 4.4% for the three months ended March 31, 2001 from 2.4% for the comparable period in 2000. The relatively low effective rate in 2000 was attributable to a refund of oil severance taxes received in the first quarter of 2000 of $176,310 under Louisiana's severance tax abatement program for a well in the Boutte Field. Without this one-time refund item, the effective severance tax rate for 2000 would have been 7.8%. Excluding the effect of this refund in 2000, the effective severance tax rate actually decreased between first quarter 2000 and the comparable quarter in 2001, due primarily to the 125% increase in gas sales in 2001 over 2000, where the severance tax rate is related to the volumes sold, rather than the sales value. This decrease in 2001 is partially offset by an increase in oil severance taxes due to the expiration of severance tax exemptions on the Harrison #3 well. GENERAL AND ADMINISTRATIVE EXPENSES - For the three months ended March 31, 2001 general and administrative ("G&A") expenses were $4.19 per BOE, a 73% increase from the $2.42 per BOE 9 for the first three months of 2000. The first quarter increase in G&A per BOE in 2001 resulted primarily from the decrease in production during the first quarter of 2001 as compared to the first quarter of 2000, combined with an increase in the total actual G&A between the periods. For the first three months of 2001, actual G&A increased 49%, from $389,397 in 2000 to $579,465 in 2001. The increase of $190,068 in actual G&A expenses for the three month period ended March 31, 2001 was the result of increases in contract services, salaries, and travel expenses. We capitalized $234,892 of our G&A into the full cost pool in the first quarter of 2000 and $255,815 of G&A was similarly capitalized in the first quarter of 2001. Without this capitalization of G&A, actual G&A in the first quarter of 2001 increased $211,000, or 34%, over the comparable 2000 first quarter. REORGANIZATION COSTS - In conjunction with our reorganization under Chapter 11, as discussed in our Form 10K for the year ended December 31, 2000 (file number 333-31375) filed with the Commission on April 2, 2001, we incurred additional reorganization costs of $1,383,600 during the first quarter of 2000. No such reorganization costs were incurred in the first quarter of 2001. DEPRECIATION, DEPLETION AND AMORTIZATION EXPENSE - For the three months ended March 31, 2001 depreciation, depletion and amortization ("DD&A") expense decreased 40.1% from the comparable 2000 period. The DD&A decrease from the first quarter of 2000 to 2001 is attributable to our decreased production and related future capital costs between the comparable periods for 2000 and 2001, combined with the effect of the historically high year-end gas prices at December 31, 2000, as reflected in our reserve report, and our use of the future gross revenue method of computing DD&A. On a BOE basis, which reflects the decreases in production, the DD&A rate for the first three months of 2001 was $5.24 per BOE compared to $7.52 per BOE for the same period in 2000, a decrease of 30.3%. INTEREST EXPENSE - All interest expense incurred in the first quarter of 2000 and in the first quarter of 2001 was capitalized into the unevaluated properties. Net of the interest capitalized for each of these periods, interest expense actually increased to $52,000 for the first quarter of 2001 from $44,000 for the comparable 2000 period. This increase in interest expense is due to the addition of $984,000 to our notes payable to the creditors in bankruptcy, resulting from a judgment in favor of the creditor in the second half of 2000. NET INCOME (LOSS) FROM OPERATIONS - Due to the factors described above, the net income from operations for the three months ended March 31, 2001 was $2.7 million, an increase of $1.8 million over the net income of $877,431 reported for the first three months of 2000. LIQUIDITY AND CAPITAL RESOURCES WORKING CAPITAL AND CASH FLOW - As of March 31, 2001, we had $6.5 million of working capital, compared to working capital at March 31, 2000 of $1.1 million. The large working capital increase between the first quarter of 2000 and the first quarter of 2001 resulted primarily from the large increase in natural gas prices during the period between the comparable quarters, combined with the fact that we did not drill any new wells during the intervening period. Our realized oil and gas prices increased 9% and 171%, respectively, from the first quarter of 2000 to the first quarter of 2001. During the same period oil production declined 11% and gas production declined 17%. The combination of the increase in product prices and the decrease in 10 production volumes for the first quarter of 2001 increased our revenues from production, from $3.2 million in the first quarter of 2000 to $5.1 million in the first quarter of 2001. We believe that our cash on hand plus the expected normal cash flow from operations will be sufficient to fund our working capital needs for the remainder of 2001. See also "Recent Developments" above. The following summary table reflects our comparative cash flows for the three month periods ended March 31, 2001 and 2000:

For the three months ended March 31, 2001 net cash provided by operating activities increased to $3.99 million from $1.76 million during the comparable period in 2000. Cash used in investing activities during the three months ended March 31, 2001 increased to $800,000 from $988,000 during the comparable period in 2000. Cash used by financing activities increased from $222,000 in the first quarter of 2000 to $299,000 of cash used during the first quarter of 2001. HEDGING ACTIVITIES -For the periods ended March 31, 2001 and 2000, we recorded additions to oil and gas sales of $-0- and $109,800, respectively, under hedging agreements. We entered into a forward sales agreement to sell 200 barrels per day of its oil production in October, 1999 for the twelve months ending November 30, 2000, at a price of $22.05 per barrel. As of March 31, 2001 and through May 14, 2001, we had no open forward gas sales positions. ACCOUNTING CHANGES - In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." We adopted SFAS No. 133 on January 1, 2001. SFAS No.133 establishes accounting and reporting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value, and that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Certain contracts that provide for the purchase or sale of a commodity that will be delivered in quantities expected to be used or sold by us over a reasonable period in the normal course of business may qualify for exemption from the provisions of SFAS No. 133. Our fixed-price forward sales contracts and swap contracts cover the pricing of physical delivery of our production in the normal course of business and are not subject to the requirements of SFAS No. 133 as we have designated these as normal sales. Therefore, the adoption of SFAS No. 133 did not have a material impact on our financial position or results of operations. 11 RISK FACTORS A detailed discussion of risks and uncertainties which could affect our future results and the forward looking statements contained in this report can be found in the "Item 1. Business - Cautionary Statements" section of our Annual Report on Form 10-K for the year ended December 31, 2000. Those risks and uncertainties remain applicable to our operations. FORWARD-LOOKING STATEMENTS This Management's Discussion and Analysis of Financial Condition and Results of Operations, including but not limited to the discussions of Liquidity and Capital Resources, includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact included in the discussions are forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, such forward-looking statements are based on numerous assumptions (some of which may prove to be incorrect) and are subject to risks and uncertainties which could cause the actual results to differ materially from our expectations. Such risks and uncertainties include, but are not limited to, the timing and extent of changes in commodity prices for oil and gas, the need to develop and replace reserves, environmental risks, drilling and operating risks, risks related to exploration and development, uncertainties about the estimates of reserves, competition, government regulations and our ability to meet its stated business goals, as well as other risks and uncertainties discussed in this and our other filings with the Securities and Exchange Commission (the "Cautionary Statements"). We undertake no obligation to update or revise any forward-looking statements, whether as a result of changes in actual results, changes in assumptions or other factors affecting such statements. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the Cautionary Statements. 12 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our revenues are derived from the sale of oil and natural gas production. With the objective of achieving more predictable revenues and cash flows and reducing the exposure to fluctuations in oil and natural gas prices, from time to time, we may enter into hedging transactions which fix, for specific periods and specific volumes of production, the prices the Company will receive for its production. These agreements reduce the our exposure to decreases in the commodity prices on the hedged volumes, while also limiting the benefit we might otherwise have received from increases in commodity prices of the hedged production. We use hedging transactions for price protection purposes on a limited amount of its future production and do not use these agreements for speculative or trading purposes. The impact of hedges is recognized in oil and gas sales in the period the related production revenues are accrued. Based on projected annual production volumes for 2001, a 10% decline in the prices we receives for its oil and natural gas production would have an approximate $21.6 million negative impact on our discounted future net revenues. 13 PART II ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBIT - None (b) REPORTS ON FORM 8-K Current Report on Form 8-K dated March 27, 2001. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FORMAN PETROLEUM CORPORATION Date: May 15, 2000 By: /s/ JEFFREY CLARKE -------------------------------- Jeffrey Clarke President By: /s/ MICHAEL H. PRICE ------------------------------- Michael H. Price Chief Financial Officer 15

FORMAN PETROLEUM CORP 10-Q